Tag: regulatory

FIA Sets Forth Five Core Principles in Enhancing CFTC Market Surveillance

In a response to a request by the CFTC’s Technology Advisory Committee for comment on how best to develop a 21st century surveillance system, the Financial Industry Association (FIA) and the FIA Principal Traders Group submitted a comment letter this week setting forth five core principles for modernizing market surveillance. In the comment letter, Walt Lukken, president and CEO of the FIA, urged the CFTC to rely heavily on existing resources moving forward, even as it “leverage[s] the evolving and changing technological landscape and reform[s] its surveillance and oversight mission in a significant and technologically-adept way.”

The FIA suggested that the CFTC approach surveillance modernization in a manner consistent with its longstanding practice of delegating front-line surveillance responsibilities to the exchanges themselves and that the regulatory body avoid building new systems that replicate those built or commissioned by existing exchanges. Even in implementing new enhanced cross-DCM surveillance routines, the FIA contended, the CFTC could utilize existing large trader and daily transaction reports to test and validate these processes. Additionally, the FIA stressed the importance of increasing the technical and analytical expertise of the CFTC staff through training and targeted hiring, and encouraged the CFTC to maintain data privacy as a priority in developing new market surveillance systems.



Commissioners Unhappy With CFTC No-Action Letters

Several commissioners have spoken out over the CFTC’s no-action letters, claiming that many of them were instituted hastily, leaving little time to review or edit them.

The Commodity Futures Trading Commission has put in place almost 70 rules since the 2010 regulatory reform law was put into place. Of these rules, 36 were related to Dodd-Frank. However, within these 36 rules, over 200 no-action letters or other forms of guidance have had to be issued after the rules were instituted.

Some commissioners have defended the CFTC no-action letters, saying that their use was inevitable, as overhauling the operations of the $600 trillion dollar derivatives market is no small task. As former commissioner Micheal Dunn explained it to Risk.net, “You can’t make an omelette without breaking some eggs.”

Most commissioners agree that some no-action letters will be necessary. However, it seems for many commissioners, the issue revolves around how the CFTC no-action letters were instituted.

Commissioners have pointed out that while some of the no-action letters are only temporary, quite a few of them are indefinite or permanent. Many of the commissioners only received notice of the letters the night before they were issued, which has them feeling as though their input had not been considered over what is essentially a complete change in policy.

CFTC chairman nominee Timothy Massad recognized the need for a more streamlined and organized rule making process while being questioned at a confirmation hearing by the Senate.

While former CFTC chairman Gary Gensler spent most of his time putting many of the Dodd-Frank rules into place, it seems Massad’s focus will fall on figuring out how to amend and enforce these rules.

CFTC and FERC Reach Data Sharing Agreement Through MOU

The Commodity Futures Trading Commission and the Federal Energy Regulatory Commission have released a “Memorandum of Understanding” (MOU) detailing their agreement to share market data between one another.

The MOU was put in place in early January, and the CFTC and FERC began more freely transmitting market data to one another just last week.

As it turns out, getting the two regulators to share market data has been a long time coming, with the need for an agreement being first discussed over three years ago.

The MOU will ensure that market data needed by either regulator will be quickly and easily shared between them. Previously, requests for market data had be placed and reviewed on a case-specific basis.

The announcement of a more free flowing form of data sharing between the regulators was announced on March 5th, along with an Interagency Surveillance and Data Analytics Working Group that will coordinate the sharing of data and help focus on, among other things, data security and data sharing infrastructure.

The sharing of data between the CFTC and the FERC marks progress, and should certainly help to create a safer and more transparent market.

Federal Reserve to Discuss New Physical Commodity Rules

According to Reuters, the Federal Reserve is setting up to take public comments on new physical commodity rules that will limit banks’ ability to trade certain commodities this week.

This marks the Federal Reserve’s first steps in what will most likely be a long road ahead for reforming physical commodity rules. The driving force behind this reform comes from public and political complaints over the risk involved with having banks trade physical commodities like crude oil and aluminum.

During a Senate hearing last July, people involved in the industry spoke out about the banks’ ownership of the storage facilities that are required for physical commodities, and how this allowed them to inflate prices. Hundreds of millions were paid out in fines by big banks for manipulating energy markets in 2013 alone, producing a strong argument for reforming physical commodity rules.

Those taking part in the hearing as witnesses will include Norman Bay of the Federal Energy Regulatory Commission (FERC), market oversight chief Vince McGonagle of the Commodity Futures Trading Commission (CFTC), and Michael Gibson, the Federal Reserve’s director of banking supervision and regulation.

The Federal Reserve has not disclosed how it plans to reform physical commodity rules, but members of the industry will have 60 to 90 days to submit letters to be used in the forming of these new rules after the hearing.

Commissioner O’Malia on the CFTC: More Technology, Less Insanity

According to Automatedtrader.net, the Commodity Futures Trading Commission’s Scott O’Malia is hoping to see some changes to the CFTC over the next year.

O’Malia has been rather vocal in his disagreement with many of the CFTC’s moves recently, feeling that the Commission was acting overly aggressive in its rulemaking process, going as far as to call its recent attempts at cross-border trading regulation “regulatory insanity.”

Commissioner O’Malia’s sentiment may see some affirmation soon, as the several Wall Street organizations filed a lawsuit against the organization over these very rules just this Wednesday, claiming that the Commission had over stepped its boundaries, and that it did not give affected parties enough time to comment on the proposed rules before implementation.

O’Malia is hoping that the CFTC will be able to work more effectively with overseas regulators, who have also criticized the Commission’s rule making process. O’Malia would like to see the CFTC begin to slow down a bit and focus on writing up regulation more efficiently, citing the 130 exemptions and no-action letters it has had to issue over the 67 rules the Commission has implemented as cause for concern.

Outside of its rule making procedures, O’Malia has also expressed desire for the CFTC to ramp up its technology department. The commissioner feels that the CFTC is extremely outdated, and has stated that it would take the organization weeks to produce even rather basic statistics on SEF trading. As the alpha watchdog of an over 600 trillion dollar market that is constantly updating its own technology, it’s easy to understand O’Malia’s concern with the notoriously underfunded commission’s ability to keep up.

With CFTC chairman Gary Gensler, and Commissioner Bart Chilton– both of whom are considered extremely aggressive in terms of Wall Street reform– stepping down soon, it seems possible that O’Malia may very well see some of the changes he is hoping for come to fruition, though whether or not the CFTC receives the funding it needs is still anyone’s guess.


Federal Reserve to Delay Commodity Regulation until Next Year

According to Reuters, it seems unlikely that the Federal Reserve will be detailing their plans on commodity regulation until after next month’s Senate hearing over the rigging of the aluminum market. A final decision on commodity regulation should be expected early next year.

After receiving complaints from MillerCoors, the Federal Reserve is looking into a decade old rule that allows large banks to trade physical commodities. According to MillerCoors and other large aluminum manufacturers, banks trading stocks in aluminum were driving up the price through their control of warehouses.

Although they are waiting until after the hearing to move forward, the Federal Reserve will not be taking market manipulation into account, leaving the issue up to the Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC).

The review of commodity regulation rules has many banks feeling the heat. Many feel that the Federal Reserve will implement new rules that will drive up the cost of business for trading. This fear has already led some banks to sell their positions and give up on the physical commodities industry all together.

The Federal Reserve will also not be doing much to change the significant amount of scope in the industry some banks have over others. Banks who changed their status to bank holding companies allowed them to grandfather in their commodity trading activates, including the storage and transportation of commodities, saying that they may change some orders, but are unlikely to change the law as a whole.

CFTC and SEC Working to Strengthen Volcker Rule

According to Bloomberg.com, CFTC Chairman Gary Gensler and Kara Stein of the SEC have expressed concerns that changes need to be made to the Volcker rule. Scheduled to be set in place by the end of the year, Gensler and Stein are worried that a section of the rule, designed to limit banks’ ability to engage in proprietary trading, contains a loophole that would allow banks to continue trading by classifying it as hedging activity.

In order to prevent this, the Volcker rule will be revised to clearly define what will be considered legitimate hedging and what will be considered proprietary trading.

Tightening the Volcker rule is considered by regulatory agencies to be important for preventing a financial crisis similar to 2008. However, many worry that doing so may heavily affect banks’ profits; Standard and Poor’s has stated that big banks may lose a total of anywhere from two to ten billion dollars a year depending on how the Volcker rule pans out.

Many are also worried about whether or not the Volcker rule will be ready to be passed by the end of the year, with these revisions coming last minute and the government shutdown slowing the CFTC’s ability to work on the rule.

It seems that most banks are preparing for the rule despite delays; many have already begun to halt trading and pull out of investments that will be outlawed after the Volcker rule is put in place.

Obama Puts Pressure on Regulators to Push Dodd-Frank

President Barack Obama met with Wall St regulators on Monday, August 19th 2013 to discuss the progress made after the 2010 passing of the Dodd-Frank Act. According to The Wall Street Journal, Obama is urging key regulators to implement many sections of the Act in order to avoid any situation similar to the Great Recession. In attendance at this meeting were key players from the Securities and Exchange Commission, Commodity Futures Trading Commission, and the Treasury.

While the Dodd-Frank was passed and signed into law in 2010, many of the key regulatory reforms still haven’t become a reality, including the controversial “Volcker Rule,” which was created to limit proprietary trading and the liabilities larger banks may hold at a time. According to an article in the Wall Street Journal, Treasury secretary Jacob Lew predicts that the Volcker Rule will be in effect by the end of the year. Others remain less optimistic, citing the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) both encountering budget restrictions.

According to an report done by  Davis Polk & Wardwell LLP, less the 40% of the rules in the Dodd Frank were finished by July 1st, 2012.



Regulatory Giants Discuss Disaster Recovery Relief in Regards to Sandy

Hurricane Sandy took a physical toll on New York City, but a joint meeting of the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and the Commodity Futures Trading Commission (CFTC) on the topic of disaster recovery, proved that it’s not just physical damage that companies are worried about.

Hurricane Sandy, which touched down in New York City on October 28th and 29th, disrupted several equities and options markets. On August 16th, 2013, officials from these regulatory giants met to discuss further improvements that can be made to stem the effects another natural disaster may have on the financial systems. Based on their discussion, they proposed a three point best practices of disaster recovery which is posted on the CFTC website.

The first point of their “Business Continuity Planning” paper is “Widespread Disruption Considerations,” which advocates that firms that might be affected by power outages, etc., take any natural disaster into consideration. Certain issues became very apparent during Hurricane Sandy, such as lack of remote access, which relies on internet and phone communication.

The second part of their three point continuity plan is the “Alternative Locations Considerations” which recommends that equities and options firms take precautions by thinking of a potential secondary location that won’t be disrupted in case of a ‘regional’ outage, such as was witnessed during Sandy. This section includes important issues such as power generators, staffing, adequate resources and shuttle services. Lastly, the committee advocates evaluating vendor relations, including services such as settlement, banking and finance.

A full version of the “Business Continuity Planning” can be found on the CFTC website.

Gensler: CFTC Faces Challenges Implementing Volcker Rule

On Tuesday July 30th, Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), testified before US Senate Committee that one of the largest issues the CFTC will confront in the coming years is the implementation of the Volcker Rule, which will prohibit all banks from doing proprietary trading.

Also in his testimony, Gensler cited the recent progress made with cross-border swaps regulation in addition to registration of securities as positive steps forward in the CFTC’s aim to create transparency in the futures industry.

Gensler stated in his testimony to the CFTC that the Volcker Rule, which prohibits banks from using deposits in speculative trades that do not benefit consumers, is in the process of being adopted by the US. However, he also mentioned that he will have to cooperate with certain domestic regulatory bodies to fully implement the ruling.

Other issues Gensler states could pose challenging to the CFTC include the regulation and evaluation of benchmarks. He said, in his speech to the US Senate Committee on Banking, Housing and Urban Affairs that the CFTC will have to work in close connection with international regulators to ensure these benchmarks are based on “fact, not fiction,” as Gensler said. The International Organization of Securities Commissions (IOSCO) created a taskforce looking into benchmarks of the financial industry, and the CFTC has worked with them in the past to ensure overarching international regulation is up to standards.

A full transcript of Gary Gensler’s testimony can be found on the CFTC website.